April 2008 Archives

Homebuyers, homeowners, real estate agents, and mortgage brokers have all been awaiting, with high expectation, details on the new "jumbo light" loan limits and lending standards. Everyone had hoped these new loans, authorized by the Economic Stimulus Act of 2008, would provide lower interest rates for folks trying to buy or refinance homes in high-cost markets.

Well, the lending limits and standards are finally here, and (drumroll please) it looks like these new loans will do... nothing. That's right. Due to heavy restrictions on the loans, most people won't qualify for one. And even if they do, the interest rates are still much higher than those for traditional conforming loans.

What does this mean? For starters, people living in high-cost real estate markets that are having trouble meeting their mortgage obligations, or are already behind in payments, won't get relief from a jumbo light loan. Those folks will (1) continue to struggle, or (2) join the large ranks of those in foreclosure. And those trying to buy a home in a high-cost market won't get help from jumbo light loans either. So much for economic stimulus.

Here are the details of how all this works:

What Are Jumbo Light Loans? In the past, Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) could guarantee real estate loans up to $417,000. In a nutshell, the guarantee meant lower interest rates for those loans -- which, in turn, made them more affordable. Loans above $417,000 (called "jumbo loans") carried higher interest rates, due to a perceived greater risk. In its Economic Stimulus Act of 2008, Congress authorized Fannie Mae, Freddie Mac, and the FHA to guarantee (until December 1, 2008) mortgages as large as $729,750 in some high-cost markets.

This creates three types of loans:

(1) Traditional loans under $417,000 (called conforming loans).

(2) "Jumbo conforming loans" or "jumbo lights" (between $417,000 and up to $729,750). The upper lending limit depends on where you live. To find out what the limit is in your area, check the HUD FHA Mortgage Limits.

The hope was that the new category of jumbo light loans would carry lower interest rates, so that people in high-cost real estate markets could more easily buy a home or refinance an existing mortgage. Alas, according to mortgage brokers, the qualifying guidelines for jumbo light loans are so difficult to meet that many people cannot get one.

Restrictive Qualification Rules. Some examples of these restrictive guidelines are:

The Debt-to-Income Ratiomust be no more than 45%. This means that your total monthly housing expenses (mortgage, home insurance, taxes, and other home related expenses) divided by your gross monthly income is less than 45%. In high-cost housing markets, where people have to spend a large portion of their income on housing, these limits may be tough to meet. Yet these high-cost housing markets are precisely where the need for jumbo light loans is greatest.

Borrowers must submit full documentation of income and assets (which can be especially difficult for self-employed people, since the typical self-employed person can deduct a variety of expenses and show very little income at the end of the year).

Borrowers must have a credit score of at least 700 if their LTV is greater than 80% or at least 680 if their LTV is less than 80%. This factor alone eliminates a lot of would-be borrowers.

Borrowers cannot have made a late mortgage payment within the last 12 months. Oh well.

In addition, those who are refinancing cannot wrap a second mortgage into the new jumbo light loan. Because second mortgage holders are skittish in the present market, borrowers may have to repay a substantial percentage of their second mortgage in order to refinance the first.

Not Much Relief in Interest Rates. In addition to these restrictions, the hoped-for favorable interest rates of jumbo light loans haven't yet materialized. Currently, the interest rates for jumbo lights range from 7% to upwards of 7.5%, not much better than rates for the regular jumbo. In contrast, the interest rates for traditional conforming loans are less than 6%.

Jumbo Light Loans May Improve in the Future. Some experts believe that it will take jumbo light loans a while to hit their stride, and once they do, interest rates may dip a bit. Some predict that for this reason, Congress may extend the planned December 31, 2008 expiration date.

With home values having recently gone down in many parts of the U.S., held steady in others, and even shown gains in a few areas, how are your supposed to know whether you're paying the right price for a home?

We gave a lot of advice for assessing the market in our book (Nolo's Essential Guide to Buying Your First Home) -- things like going to lots of open houses, checking comparable sales prices on sites like Zillow, and asking your real estate agent to prepare a report on sales prices of comparable properties (the "comps").

That advice still holds true -- but as was recently pointed out in an article by Realtor Magazine (a professional publication), it's especially important to pay attention to the prices of pending, rather than closed, sales, for the basic reason that they're the most recent. (And in a falling market, the appropriate price for the house you want to buy may be even less than the most recent pending comps.)

A good real estate agent will present the prices of pending properties to you no matter the market and explain any trends. But it helps if you know what you're looking for -- and, in some cases, what to ask for.

Homebuyers with dogs, get ready to say goodbye to muddy paws: Pet showers (which we only recently blogged as a must-have among British pet owners) are now on the list of what's newly trendy among U.S. home buyers. Yes, it's right up there along with a reduced carbon footprint, home elevators, outdoor living spaces, concealed appliances, and giant bathrooms.

Who makes these lists? This one comes from Mark Nash, one of the trusted advisers to our book (Nolo's Essential Guide to Buying Your First Home). He compiled results from an e-zine survery, and the results were reported in Realtor Magazine (scroll down to the article, "What's In, What's Out").

By now, many of us have heard of the latest trend in foreclosure sales: shepherding a group of interested buyers onto a bus, then driving them around to look at foreclosed homes (and maybe stopping for lunch along the way). Definitely efficient for the agent involved, probably interesting for the potential buyers.

In many states, there's lots to choose from. But buyers who think every distressed property is a good deal should think again. There's usually very little room to negotiate with the lender, and waiting for a reply can take awhile. I have a friend who put in an offer on a short sale three weeks ago, and is still waiting for lender approval.

Another potential problem is that you may have to take the property "as is." That means you won't have the benefit of a professional property inspector to look the place over (though apparently, some foreclosure tours bring one along). If you find problems later, they're yours to fix, even if they were the prior owner's fault.

Finally, there's the simple problem of moving into a house that may be in disrepair. Beyond worrying about whether everything works properly, you may have to do some serious work to make the place habitable. Some houses are even missing their fixtures or kitchen cabinetry (and there's a trend in stealing copper wiring -- sadly, sometimes worth more than the house itself).

Even if all these factors don't deter you, do your own research first. In a market full of opportunity, you'll probably be able to find a home without these problems at a fair price. And you shouldn't have a problem finding a real estate agent eager to take you on a personalized tour, either.